Turkey Bonds, Stocks Surge as Erdogan Escapes Ban in Court Case

By Seda Sezer and Ayla Jean Yackley

July 31 (Bloomberg) -- Turkish bonds gained the most in two years and stocks also surged after Prime Minister Recep Tayyip Erdogan's party escaped a ban for seeking to introduce Islamic law in secular Turkey.

The Constitutional Court yesterday rejected a call by prosecutors to shut down the Justice and Development Party and ban Erdogan and other leaders, instead voting to reduce state funding to the party. Concern that Erdogan's government, which has presided over record economic growth and foreign investment, may be ousted by the court helped send the ISE National 100 Index down as much as 40 percent this year.

``It's a milestone decision,'' said Vassilis Karatzas, who manages about $100 million of Turkish assets at Levant Partners Greece SA in Athens. ``In the next year or two, this decision will provide political stability in Turkey, which is important for markets.''

Yields on lira bonds fell as much as 89 points, the most since July 2006, according to ABN Amro benchmark prices. The ISE- 100 stock index added 4.4 percent as of 9:45 a.m. in Istanbul. Trading in bonds and stocks had ended before last night's verdict. The currency also extended gains today, rising to 1.166 per dollar.

Erdogan said last night that he'll press ahead with measures to win European Union membership for Turkey, which started entry talks with the bloc in 2005. His party's closure would have jeopardized that agenda and threatened growth in the $660 billion economy, which has expanded at an annual average pace of almost 7 percent since Erdogan came to power in 2002.

A verdict to shut down the Justice party would have brought ``significant volatility in Turkish asset prices,'' Tolga Ediz, an economist at Lehman Brothers Holdings Inc. in London, said in a July 25 report. ``We would expect growth to suffer too.''

EU Reforms

EU Enlargement Commissioner Olli Rehn last night urged Turkey ``now to resume with full energy its reforms to modernize the country.''

Erdogan may reshuffle his Cabinet after the ruling and start work on a new constitution that would ease the concerns of his secular opponents, Milliyet newspaper reported today, citing unidentified members of his party.

Stocks and bonds slumped after prosecutors filed the lawsuit against Erdogan in March. They've rallied this month as investors bet the court wouldn't ban Erdogan's party.

Biggest Gainer

Since falling to a two-year low on July 1, the ISE-100 stock index has surged 29 percent, including a 5.6 percent jump yesterday that was the biggest in six months. The benchmark's gain in July is the largest among 88 global indexes tracked by Bloomberg News.

Before this month's rebound, Turkey was the cheapest market in Europe, with the ISE-100 valued at 6.5 times the average earnings of its companies, data compiled by Bloomberg show. National benchmark indexes in Ireland, the Netherlands, Belgium, and Luxembourg now trade at a lower price-to-earnings ratio than Turkey's 8.4, Bloomberg data show.

Emre Balkeser, a trader at Finans Invest in Istanbul, said there's still room for gains in Turkish stocks because some investors preferred to wait for the ruling instead of placing their bets beforehand.

``We'll see the rally continue, because the buying was limited to the very gutsy investors who put their money down before everything became clear,'' he said.

To contact the reporters on this story: Ayla Jean Yackley in Istanbul at ayackley@bloomberg.net; Seda Sezer in Istanbul at sezer2@bloomberg.net